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United States District Court, Southern District of New York

April 1, 2002


The opinion of the court was delivered by: Lewis A. Kaplan, United States District Judge.


This case concerns the provision of billing and other services to adult content Internet web sites. It has been the subject of several previous opinions and orders,*fn1 familiarity with which is assumed. The matter now is before the Court on the FTC's motion to extend the existing preliminary injunction to a recently joined defendant, Automatic Communications Limited ("ACL"), and defendants' motion for judgment on the pleadings dismissing the complaint. In view of certain issues raised by ACL, the Court has the benefit of an amicus brief filed on behalf of the Federal Communications Commission ("FCC").


ACL is an Australian company which, together with affiliates, has operated an Internet billing service for some time. Although there have been changes over time, the essence of the service has remained the same through the relevant period.

Defendants made available to their clients software that presented a computer user who accessed a client Internet web site*fn2 with a series of screens purportedly setting forth the terms and conditions of use of the site. If the user clicked a box stating "I agree," a dialer computer program supplied by defendants automatically downloaded to the user's computer, disconnected the user's modem from its ISP, and placed a call to a Madagascar telephone number assigned by Madagascar to ACL. ACL then "stopped" the call in the United Kingdom and reconnected it to the client web site, enabling the user to view the contents of the site. The subscriber of the line from which the call to the Madagascar number had been placed — who may or may not have been the person or entity that placed the call — then was identified through automatic number identification ("ANI") and billed for a purported international telephone call to Madagascar, although the charge in fact was that imposed for access to the contents of the site.*fn3 Defendants then divided the proceeds of the bills with the client web site operators in accordance with their contractual arrangements.

Beginning in January 1999, ACL had agreements with AT & T and, briefly, Sprint to handle this traffic and bill customers. In the summer of 2000, however, it chose to have the billing handled by its affiliate, Verity International, Ltd. ("Verity"). The switchover to Verity was a disaster,*fn4 and it led to the commencement of this action against, insofar as is relevant here, Verity and its principals, Robert Green and Marilyn Shein. The essence of the FTC's position is that (1) defendants' insistence that line subscribers are legally obligated to pay for access to these web sites where the line subscribers neither used them nor authorized such use, and (2) billing of calls "stopped" in the United Kingdom as calls to Madagascar both violated Section 5(a) of the Federal Trade Commission Act (the "FTC Act").*fn5

On January 4, 2001, the Court granted the Commission's motion for a preliminary injunction and an asset freeze.*fn6 The complaint, however, was ambiguous as to whether it sought relief in respect of the period prior to Verity's commencement of billing. Accordingly, relief was limited to the Verity period.

In March 2001, the FTC filed a second amended complaint, adding ACL as a defendant and expanded its claims to the period in which billing was done by AT & T and Sprint on behalf of ACL. The Commission then moved to extend the preliminary injunction to ACL, and defendants made related cross-motions. These motions have been resolved in all respects but one. The Court reserved the issue of the extension of the preliminary injunction to ACL*fn7 and conducted an evidentiary hearing on that subject on June 5, 2001.


Defendants move for judgment on the pleadings on four grounds. First, they maintain that ACL is a common carrier and thus outside the FTC's jurisdiction.*fn8 Next, they contend that the filed rate doctrine precludes line subscribers from disputing the charges at issue because they were imposed in accordance with tariffs filed with the FCC. Third, defendants argue that the FCC has primary jurisdiction over this case or, at least, certain issues it presents. Finally, they assert that the complaint does not plead fraud with the particularity required by Rule 9 (b).

A. FTC Act Jurisdiction

The FTC Act explicitly excludes from its coverage "common carriers subject to the Acts to regulate commerce."*fn9 It defines the Communications Act of 1934 ("Communications Act") as such a statute.*fn10 Some time in 1999, ACL applied to the FCC for authority under Section 214 of the Communications Act*fn11 to become a facilities- or resale-based international common carrier. It appears that the application was granted and a tariff filed shortly thereafter.*fn12 ACL contends that its activities therefore are beyond the reach of the FTC.

ACL's argument presupposes that once the FCC licenses an entity as a common carrier, it is a common carrier for all purposes and thus entirely beyond the reach of the FTC. But that premise is fundamentally erroneous. An entity that is a common carrier may engage in a broad range of activities, some integral to its functions as a common carrier and some entirely extraneous to them. Even where Congress commits regulation of common carrier activities to a particular agency, it would make little sense to exempt a carrier s extraneous activities from laws of general application affecting the broad sweep of American business. In fact, ACL has conceded that the Communications Act, as amended, specifically states that "a telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services."*fn13 Thus, the better considered authorities, as well as the FCC, agree that whether an entity is a common carrier for regulatory purposes depends on the particular activity at issue.*fn14 In other words, an entity may be a common carrier within the meaning of the Communications Act for some purposes and not for others.*fn15

To be sure, FTC v. Miller,*fn16 upon which ACL relies heavily, indicates otherwise. The Seventh Circuit there quashed FTC subpoenas served on a mobile home transporting company in an investigation of alleged unfair trade practices on the ground that the respondent operated under a certificate of convenience and necessity issued by the Interstate Commerce Commission and therefore was a common carrier exempt from FTC scrutiny under Section 5(a)(2) of the FTC Act.*fn17 Indeed, ACL goes on to point out that language in Miller to the effect that the Section 5(a)(2) exemption depends on the status of the party under scrutiny rather than its conduct was quoted by the Second Circuit in Official Airline Guides, Inc. v. FTC ("OAG")*fn18 with apparent approval. But neither Miller nor OAG is persuasive here.

As far as Miller is concerned, it is inconsistent with common sense proposition that the carrier exemption to the FTC Act should be construed no more broadly than its purpose — to avoid interfering with the regulation of carriers by agencies to which their regulation is committed. There was no inherent inconsistency between ICC regulation of, for example, entry into and rates charged by interstate trucking companies and FTC investigation of their allegedly unfair trade practices. Hence, this Court, agrees with other courts and the FCC, which hold that the term "common carrier . . . indicates not an entity but rather an activity as to which an entity is a common carrier."*fn19 Indeed, it must be borne in mind that Miller concerned the Interstate Commerce rather than the Communications Act. The Communications Act, as amended by the Telecommunications Act of 1996, specifically states that "a telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services,"*fn20 implying that an entity can be treated as a common carrier for certain activities and not as a common carrier for non-telecommunications activities.

Nor is OAG of greater help to ACL. The Second Circuit there held that a company that published flight schedules was not exempt from the FTC Act under the exemption for air carriers equivalent to that for common carriers. Although some of the language suggests that status is more important than activity,*fn21 the case itself addresses whether an entity that is not a carrier falls into the exception when its activities are subject to regulation under the relevant act. In contrast, here the question is whether the activities — even those not regulated by the Communications Act — of an entity that is licensed as a carrier are beyond the scope of the FTC Act.*fn22 Moreover, underlying the reasoning in Official Airline Guides is a comparison of the "broad mandate given to the [Federal Trade] Commission to enforce section 5" with "the narrow exemption from the Commission s jurisdiction."*fn23 In these circumstances, these policies support a holding that ACL is not exempt.

This is precisely the conclusion advocated by the FCC, the agency charged with administration of the Communications Act, as amicus.*fn24 While not entitled to full Chevron deference, the FCC's informal views on this subject certainly are entitled to some deference.*fn25 It points out that FCC regulations define a communication common carrier as any person engaged in rendering communication service for hire to the public."*fn26 The regulation has been construed as establishing a two prong test determinative of common carrier status. First, the "primary sine qua non . . . is a quasi-public character, which arises out of the undertaking to carry for all people indifferently."*fn27 The second is "that the system be such that customers `transmit intelligence of their own design and choosing.'"*fn28

ACL has described its business as being comprised of three activities: (1) obtaining the rights to certain telephone numbers in foreign countries, (2) licensing the use of those numbers to companies that market billing software to web site operators, and (3) agreeing with long distance carriers to terminate calls from the carriers' home countries to the numbers in foreign countries in respect of which ACL has acquired rights.*fn29

These activities do not satisfy the test. As the FCC has said, "[t]he ultimate test is the nature of the offering to the public."*fn30 ACL does not claim to have held itself out to the public as an indifferent provider of telecommunications services. It was AT&T, and later Sprint, that provided long distance services to the public as common carriers. ACL did not set the rates, terms or conditions for those services. Nor did it physically do the billing.*fn31 Indeed, to whatever extent that ACL might have provided transmission services on a common carrier basis, it did so as a terminating carrier as agent for Telecom Malagasy. To that extent, it stood in the shoes of Telecom Malagasy and thus was a foreign terminating carrier rather than a common carrier subject to the FCC's jurisdiction.*fn32

ACL's contention that it is a reseller and therefore a common carrier also is without merit. As the FCC points out, resale is "an activity wherein one entity subscribes to the communications services and facilities of another entity and then reoffers communications service and facilities to the public (with or without `adding value') for profit."*fn33 The only thing ACL resold was the right to terminate calls to certain Madagascar numbers.*fn34 Even this it did not sell to the general public — only to a limited group of providers to whom ACL licensed the Madagascar numbers it licensed from Telecom Malagasy.

For all of the foregoing reasons, there is no basis for concluding that the ACL activities at issue in this case are common carrier activities within the meaning of the Communications Act.

B. Primary Jurisdiction

The doctrine of primary jurisdiction allows a federal court to stay or dismiss a case that involves "technical and intricate questions of fact and policy that Congress has assigned to a specific agency,"*fn35 here potentially the FCC. The doctrine "applies where a claim is originally cognizable in the courts, but enforcement of the claim requires, or is materially aided by, the [agency's] resolution of threshold issues."*fn36 This circuit has called the scope of the doctrine "relatively narrow,"*fn37 and courts typically have deferred to agencies in actions that involved the validity of a rate or practice related to a tariff filed with an agency*fn38 or technical issues of fact.*fn39

ACL argues that the Court should defer to the FCC in part because the case raises issues including whether ACL is a common carrier and whether the filed rate doctrine applies to the activities here at issue. But resolution of such questions by courts is routine.*fn40 The more interesting issue is whether ANI billing for videotext is a deceptive trade practice in these circumstances.

The threshold question is whether the FCC has authority over this issue.*fn41 The Communicitions Act gives the FCC authority over "all interstate and foreign communication by wire or radio."*fn42 The agency has jurisdiction over common carriers and ancillary jurisdiction that permits it to take what actions are necessary to exercise its functions.*fn43 In other words, regardless of whether ACL is a common carrier, it is fairly clear that the issue is within the FCC's jurisdiction.*fn44 AT&T and Sprint are certainly common carriers, and ANI billing is a concern for telecommunications services. Moreover, although the FCC has left "enhanced" or "information" services essentially unregulated, it retains jurisdiction over them.*fn45

That the FCC appropriately might reach the issues here does not necessarily mean that this Court should defer to it. Primary jurisdiction analysis is not an exact science, but courts in this circuit generally have considered the following factors: whether an issue is within the conventional experience of judges or instead involves technical or policy determinations within the agency's particular field of expertise, whether the issue is particularly within the agency's discretion, whether there is a substantial danger of inconsistent rulings and whether prior application to the agency has been made. Finally, courts weigh the advantages of applying the doctrine against the potential costs of complications and delay resulting from the administrative proceedings.*fn46

These factors weigh against staying or dismissing this action. First, it does not involve a technical determination within the FCC's particular domain in that there are many precedents on application of the "enhanced" versus "basic" or the "information" versus "telecommunications" divide. Even when the interpretation of a tariff is involved, if an agency has already construed the tariff or "clarified the factors underlying it," a court rather than the agency appropriately might address the issue.*fn47

Second, courts usually have described an issue as within an agency's particular discretion when it involves evaluating the reasonableness of a tariff or related practice.*fn48 Here there is no comparable exercise of discretion.

Third, the danger of inconsistent rulings is not substantial in that any decision will be fact-dependant and will not concern ANI billing in general but rather will be limited to ANI billing for videotext with bills similar to those here.

Finally, a deferral to the FCC would cause unnecessary delay.

The FCC, as amicus, agrees. It does not believe that its special expertise would be helpful, as the issue here is whether ACL's role in a billing scheme was a deceptive trade practice within the meaning of the FTC Act.

C. Filed Rate Doctrine

Whether the filed rate doctrine applies is at the heart of defendants' potential liability and is addressed in detail in Verity I.*fn49 Essentially, defendants argue that the services at issue are telecommunications services rather than information services and that the filed rate doctrine therefore applies, making the representation that line subscribers were legally obligated to pay their bills accurate rather than misleading or deceptive.

Defendants add little new beyond citation to the FCC's statement in In re Federal State Joint Board on Universal Service,*fn50 which held that information service providers would not be treated as common carriers*fn51 but that an entity is deemed to provide telecommunications when it "provides a transparent transmission path [that] does not `change . . . the form and content' of the information."*fn52 Defendants argue that ACL merely provided a transparent path for information and therefore offered telecommunications service. The difficulty is that ACL is analogous neither to an ISP nor to a facilities-based common carrier like AT&T. The FCC's statement reaffirmed the mutually exclusive nature of telecommunications and information services.*fn53 It was concerned with identifying which type of service was provided by ISPs and common carriers like AT&T that connect with ISPs and/or provide both lines and information services.

Taking the factual allegations in the FTC's complaint as true, as the Court must for this motion, ACL did not merely provide a transparent transmission path. The FTC alleges that it supervised dialer disclosures, arranged to stop calls in London, and connected the consumers modems to the Internet, which would mean it was providing some combination of computing and communications services, placing it in the category of enhanced services. Accordingly, defendants have not shown that plaintiff can prove no set of facts in support of its claim that would entitle it to relief.

Once again, the FCC has supported the FTC's position. It points out that the issue here is not the validity, direct or indirect, of the tariffs applied and that ACL does not appear to be a common carrier. In consequence, it views the filed rate doctrine as affording ACL no shield against the FTC's deceptive trade practices charge.*fn54

In a related argument, advanced in a footnote, defendants request dismissal for lack of subject matter jurisdiction.*fn55 They reason that, because the filed rate doctrine applies, those who used the service did not suffer any injury and that "their surrogate" the FTC therefore did not suffer an injury. Thus, defendants argue, the FTC lacks standing and the Court lacks subject matter jurisdiction.

Dismissal on these grounds would be inappropriate for several reasons, including the fact that the plaintiff is the FTC rather than a private plaintiff and a decision on standing would merge with decision on the merits. But they need not be considered in detail as "[t]he determination of whether Article III standing exists . . . must comport with the `manner and degree of evidence required at the successive stages of the litigation.'"*fn56 On a motion for judgment on the pleadings, the facts averred by the plaintiff must be taken as true for purposes of the standing inquiry. Given this standard, the FTC clearly has alleged sufficient injury.

D. Rule 9(b)

Defendants' Rule 9(b) argument — that the FTC is making a claim of fraud and that fraud must be pled with particularity — is without merit.*fn57 The second amended complaint sufficiently details who, what, when, where and how, identifying ACL and describing its relationship to the other defendants, describing the billing system, and specifying the time period.*fn58

III. Extension of the Preliminary Injunction to ACL

The second motion before the Court is to extend the preliminary injunction to ACL. The FTC may obtain a preliminary injunction "[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest."*fn59 The standard differs from that applicable to private applicants for such relief in that the FTC does not have to show irreparable harm,*fn60 but the Court must (1) determine that the FTC has a fair and tenable chance of ultimate success on the merits*fn61 and (2) consider the equities.*fn62

ACL's principal argument against the FTC's application is simplicity itself: All the billing was done by AT&T. ACL had nothing to do with it. "Any potential liability for misrepresentations included on AT&T bills lie [sic] solely with AT&T."*fn63 With all due respect, the likelihood of ACL avoiding liability on that basis is right up there with the chance of the sun rising in the west.

A. The AT&T Connection

The scheme here at issue — the creation and marketing to web site operators of a system for using ANI billing to bill and collect for their wares, a system that appears to have included deceiving telephone line subscribers into believing that they are liable even for unauthorized use of their telephone lines to access Internet-borne pornography — has been the project of Robert Green and Marilyn Shein, both of whom have been held in contempt and are fugitives. ACL, like Verity, is simply one of the corporate vehicles they have employed*fn64 to perpetrate what, at first blush at least, seems in part to have been a very substantial swindle.*fn65 The fact is that the gravamen of the FTC's case is that the billing for access to the web sites as if the bills were for telephone service in some cases took advantage of consumers' well founded belief that they are responsible for paying for telephone calls made on their lines regardless of who made them — a premise that does not apply to services of the sort provided by ACL's customers. Thus, according to the FTC, ACL sought to benefit from a false impression created by the fact that it chose AT&T to do the billing. For ACL now to suggest that it has no liability because it arranged to have the bills printed, mailed and collected by AT&T is remarkably audacious — and remarkably devoid of merit — whether AT&T was a witting or an unwitting participant.

Further, ACL's attempt to east blame on AT&T — which would not exculpate ACL even if AT&T also were culpable — is not very promising. The pivotal question in this regard is what AT&T knew and when it knew it — in other words, whether AT&T, when it billed consumers for telephone calls to Madagascar, knew that the consumers were really being asked to pay for access to web sites — videotext services — rather than simply telephone calls. This is critical because telephone subscribers are liable for any telephone calls made on their lines, regardless of who made or authorized them, but they are not liable for unauthorized use of those lines for videotext services. Evaluating this question requires consideration of the history of ACL's relationship with AT&T.

1. ACL's Agreement with Telecom Malagasy

The parties agree, for the purposes of this motion, that ACL entered into an agreement with Telecom Malagasy ("TM") in May 1997 in which TM assigned ACL the exclusive right to carry and terminate telephone calls to a range of numbers assigned to TM by international telephone authorities. TM directed all originating countries to make accounting payments for traffic on those numbers to ACL and to transmit or terminate all of the traffic on those numbers according to ACL's instructions.*fn66 ACL then contracted with information providers ("IPs") for the right to include the Madagascar numbers in their billing systems.*fn67

2. The Contract Between ACL and AT&T

It is undisputed also that ACL, AT&T and AT&T U.K. (now Viatel) entered into an agreement in January 1999 for the carriage and termination of traffic to the Madagascar numbers assigned to ACL."*fn68 During a sixteen-month period, AT&T billed $30,618,447. from which it deducted charge backs of $11,268,778. The calls were billed according to AT&T's tariff filed with the FCC."*fn69

ACL first argues that the contract with AT&T put AT&T on notice of what ACL was doing right from the outset. The contract refers to "switched voice services" between the United States and Madagascar and describes ACL as "hold[ing] a limited telecommunication license in Madagascar to terminate audiotext calls only."*fn70 It defines "Audiotex Calls" as "calls placed to telephone numbers in Operating Territory that are advertised or promoted in the U.S. for entertainment, fundraising or information provision purposes" by ACL or a third party who is compensated by ACL.*fn71

Defendants promote a definition of audiotext that encompasses videotext, the material here involved, arguing from this premise that AT&T must have known what was going on.*fn72 It is unnecessary, however, to decide whether defendants' proposed definition is plausible, at least in some circumstances. The testimony of Stephen Bevens and John Ault, formerly of AT&T and AT&T (U.K.), respectively, which the Court credits in this regard, makes it clear that the contract itself did not give AT&T notice that AT&T would be carrying and billing for videotext. Bevens testified at the June 5 hearing that when the service initially was negotiated, it was for voice services only and included no reference to videotext.*fn73 Ault, who signed the contract for AT&T (U.K.),*fn74 stated in his May 2001 declaration that he discovered that AT&T would be carrying data transmissions and not audiotext during the contractual relationship, implying that the contract had not made it clear.*fn75

3. A T& T Discovers It Was Carrying Videotext

That the contract did not put AT&T on notice of the nature of ACL's activities does not answer the question of when AT&T tumbled to the nature of the traffic it was carrying. ACL claims that even if AT&T did not know from the contract itself, it learned that ACL was carrying videotext by virtue of explicit conversations and the fact that traffic was moved to uncompressed lines in January or February 2000. It relies principally upon testimony of Bevens and Ault.

In a May 2001 declaration, Bevens indicated that he spoke with Fox in January 2000 about the arrangement of Global Internet Billing ("GIB"), an information provider that marketed a dialer billing program with ACL's numbers, to terminate its traffic at ACL's Madagascar exchange numbers. Knowing that GIB's business was to sell dialers to information providers, he then realized, he claims, that AT&T was carrying videotext. In the same declaration, he says he spoke in February 2000 with AT&T's Consumer, Security and Public Relations divisions about AT&T transmission of data to the Madagascar numbers.*fn76 Moreover, he suggested that AT&T's security routinely tested suspect number ranges and, given the duration of calls, non-compressed lines, and modem sounds — all characteristic of data traffic — knew independently of these conversations that data was being transmitted.*fn77

Bevens' testimony is not credible on this point. In his deposition, he testified that defendants never told him that they were beginning to offer videotext services,*fn78 that he and the defendants had discussed the appropriate disclosure for voice services only, and that neither he nor, to his knowledge, others at AT&T were aware that calls were being placed by a dialer program and were being short-stopped in the U.K.*fn79 The only reason he cited for this change between the deposition and the declaration was that he had had conversations with Ault, an employee, and defendants' lawyers.*fn80 Moreover, Bevens testified at the hearing that the conversation with Fox of GIB in when she made clear that data was being transmitted occurred shortly after he sent a letter to the telecom administration in Vanuatu, apparently another common destination for this type of traffic.*fn81 This letter was written on March 23, 2000.*fn82

Nor is Ault's testimony any more persuasive on the timing issue. At the June 5 hearing, he described a surge in call volume that he thought probably occurred in February 2000 and that caused deterioration in call quality.*fn83 He testified that several conversations took place around that time with Green and AT&T (U.K.) personnel about the fact that data was being transmitted, but was unable to point to an event that coincided with the commencement of the discussions about data compression. When confronted with documentary evidence suggestive of a later date, however, he acknowledged that the conversations he referred to could have occurred in April.*fn84 His May 3, 2001, declaration is consistent with either version, as he there claimed that AT&T knew it was carrying videotext communications, but did not discuss timing.*fn85

The e-mails shown to Ault are the most reliable evidence of the timing. They were sent on April 3 and 4, 2000 by Green and employees of AT&T, Viatel and GIB. An e-mail sent by Marilyn Fox of GIB on April 3, 2000, indicated that she had had a conversation with Ault about finding uncompressed lines for the Madagascar traffic.*fn86 On April 4, 2000, Stephen Kaczmarek of Viatel wrote to Ault about such routes and Green forwarded this e-mail to Fox, who replied to Bevens and Kaczmarek that the proposal "will help the data traffic flow."*fn87

In all the circumstances, the Court finds that AT&T did not discover the nature of the traffic that it was carrying for ACL until some time in or after the first week in April, following which it promptly terminated ACL's contract.

B. Discussion

1. Likelihood of Success

The Court already has held the FTC has a fair and tenable chance of ultimately showing that ANI billing without an appropriate agreement with the line subscriber billed violates the FTC Act.*fn88 The jurisdictional and related defenses discussed above are unlikely to prove meritorious. The evidence at this stage indicates that ACL supervised website disclosures and contracted with dialer providers.*fn89 This amounts to more than mere provision of access to information, as defendants claim, and the FTC has a fair and tenable chance of showing that the services at issue were enhanced rather than basic.

The issue, then, is whether the FTC is likely to show that ACL is responsible for this billing. From what has been said already, that is quite probable.

For one thing, ACL shared the responsibility for billing during the Verity period. Green and Shein are or, at least, were the principals in both Verity and ACL. In the relationship with Integretel and its subsidiary eBillit, ACL and Verity were used interchangeably, with Verity substituted for ACL on the contracts at the last minute.*fn90 Similarly, when employees of GIB spoke with Green and Shein, it was not clear whether they were representing ACL, Verity, or Western Connections Limited, another corporation controlled by them.*fn91

Moreover, based on the finding that AT&T, which performed the actual ANI billing for that early period, did not discover that it was carrying videotext until March or April 2000, the FTC is likely to succeed in showing that ACL had AT&T carry videotext and use ANI to bill consumers for this videotext without its knowledge for at least part of the pre-Verity period at issue. ACL contracted with videotext dialer providers, particularly GIB, with this purpose. The effort to shift responsibility to AT&T is weak also as regards the claim that AT&T "knowingly supplied its CIC number" to the dialer programs, not only because the CIC number is widely available, but also because it was made available to ACL for the purposes of their contract.*fn92

2. Equities

The reasoning of the Court's initial preliminary injunction opinion applies with equal force here.*fn93 The only difference lies in the fact that fifty percent of ACL now is owned by Oriel Communicitions, Ltd. ("Oriel"), a publicly traded Australian corporation with more than four thousand shareholders.*fn94 After emerging from bankruptcy proceedings, it acquired its interest in ACL on September 20, 2000. At that point, Green and Shein each went from owning forty percent*fn95 to owning twenty percent of ACL.*fn96

The effect on Oriel's shareholders certainly is a concern, but it is mitigated by the fact that defendants are not enjoined from billing for their services in any form but can continue to bill with certain disclosures and notices to the line subscribers. Although Craig Burton, the Executive Director of Oriel, indicated that the extension of the injunction to ACL would "inflict substantial damage on Oriel,"*fn97 Mark Blanchard, a director of ACL originally from Oriel, was equivocal about the effects that an asset freeze on ACL would have on Oriel. He testified at the June 5 hearing that it would "have an impact on Oriel, but, you know, we've just bought some further businesses in Oriel"*fn98 The damage to Oriel's shareholders is also offset in part by the renegotiation of the price Oriel paid for ACL. Initially it was to pay $8 million followed by another $4 million six months later.*fn99 When the Court entered a temporary restraining order against Verity and the individual defendants. Oriel renegotiated so that the second payment was reduced in amount and made contingent on future profits.*fn100 In all the circumstances, the equities weigh in favor of extending the preliminary injunction to ACL.

3. Delay in Seeking the Preliminary Injunction

Defendants concede that the government generally is not subject to the defense of laches, but argue nonetheless that the FTC has waived the right to obtain a preliminary injunction against ACL because its delay in doing so has prejudiced Oriel, which invested in ACL.

The Second Circuit generally has followed United States v. Summerlin,*fn101 in which the Supreme Court held that the defense of laches is not available against a government entity.*fn102 The Court need not decide whether there are exceptions, as defendants argue, because even if laches were applicable, the defense would be without merit here.

"A party asserting the defense of laches must establish that: (1) the plaintiff knew of the defendant's misconduct; (2) the plaintiff inexcusably delayed in taking action; and (3) the defendant was prejudiced by the delay."*fn103 Here, prejudice is lacking because ACL and Oriel were on notice (with Green and Shein informed as to Verity), and Oriel was able to renegotiate the price it paid for ACL. Moreover, the FTC sought to extend the preliminary injunction six months after the case was filed and one month after adding ACL as a defendant. There was no inexcusable delay and no waiver.

4. Liability for Redress

Defendants contend also that an asset freeze would be "legally unsupportable" because the FTC cannot obtain the restitutionary relief it ultimately seeks.*fn104 Defendants' argument, however, is without merit.

Contrary to defendants' argument, FTC v. Five-Star Auto Club, Inc.,*fn105 does not stand for the broad proposition that "the FTC [can] only obtain restitution from a particular defendant up to the amount of actual funds that the defendant received from illegal activities."*fn106 In that case, the court found that Angela Sullivan, the wife of the primary individual defendant, Michael Sullivan, was not personally involved in creating and disseminating the deceptive materials in issue and performed only ministerial tasks for the corporate defendant.*fn107 In light of this finding, the court limited Mrs. Sullivan's liability for consumer redress to the amount by which she had benefitted from the challenged activity.*fn108 In contrast, the court held the corporate defendant liable for the full amount of consumer loss*fn109 and held Michael Sullivan, deemed "the moving force behind the wrongful acts and practices of the corporation,"*fn110 jointly and severally liable with the corporate defendant.*fn111

The Auto Club court's holding with respect to Angela Sullivan is completely inapposite to ACL's situation because it goes to the issue of individual liability for corporate practices.*fn112 Moreover, if anything, the Auto Club opinion is inconsistent with the defendants' argument regarding consumer redress. When addressing the corporate defendant's liability, it stated that "[t]he proper amount of relief is the full amount lost by consumers."*fn113 Accordingly, ACL cannot avoid the asset freeze on the grounds that it did not receive the full amounts billed by AT&T.


Defendants motion for judgment on the pleadings is denied. Plaintiffs motion to modify the preliminary injunction to extend it to ACL is granted.


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